Hazardous Waste: An Update on the Cost and Availability of Pollution Insurance (Chapter Report, 04/05/94, GAO/PEMD-94-16). An estimated 275 million metric tons of hazardous waste are treated, stored, and disposed of annually in the United States, and the volume is growing. Congress has been concerned about the difficulties encountered by some hazardous waste facilities in obtaining pollution insurance. Unless facilities can demonstrate that they have the resources to cover bodily injury and property damages resulting from their operations, they cannot legally stay in business, which raises concerns about the adequate handling of hazardous waste. This report (1) lists insurance companies providing pollution liability insurance and closure or postclosure insurance and describes the extent of coverage and the coverage costs; (2) updates the cost and availability of pollution insurance to land disposal facilities; and (3) determines the implications if state cleanup funds were made available to treatment, storage, and disposal facilities for pollution cleanup and for compensating victims who have suffered pollution, bodily injury, or property damage. --------------------------- Indexing Terms ----------------------------- REPORTNUM: PEMD-94-16 TITLE: Hazardous Waste: An Update on the Cost and Availability of Pollution Insurance DATE: 04/05/94 SUBJECT: Liability insurance Hazardous substances Industrial accidents Industrial wastes Industrial pollution Insurance companies Insurance cost control Pollution control Waste disposal IDENTIFIER: EPA Hazardous Waste Data Management System California Pennsylvania Texas Colorado Minnesota Mississippi Alaska Nevada Vermont EPA Resource Conservation and Recovery Information System ************************************************************************** * This file contains an ASCII representation of the text of a GAO * * report. 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We are unable to accept electronic orders * * for printed documents at this time. * ************************************************************************** Cover ================================================================ COVER Report to the Honorable Nancy L. Johnson, House of Representatives April 1994 HAZARDOUS WASTE - AN UPDATE ON THE COST AND AVAILABILITY OF POLLUTION INSURANCE GAO/PEMD-94-16 Pollution Insurance Cost and Availability Abbreviations =============================================================== ABBREV AIG - American International Group CGL - Comprehensive general liability EPA - Environmental Protection Agency EQD - Equivalent disposal EQN - Equivalent nondisposal GAO - General Accounting Office HWDMS - Hazardous Waste Data Management System MSD - More stringent disposal MSN - More stringent nondisposal RCRA - Resource Conservation and Recovery Act RCRIS - Resource Conservation and Recovery Information System PCB - Polychlorinated biphenyls TSD - Treatment, storage, and disposal UST - Underground storage tank Letter =============================================================== LETTER B-256573 April 5, 1994 The Honorable Nancy L. Johnson House of Representatives Dear Ms. Johnson: We are submitting this report on the availability of pollution insurance for the owners and operators of hazardous waste facilities in response to your request that we update the information contained in our earlier report on this subject (GAO/PEMD-89-6). In this study, we report on the cost and availability of insurance for the operation of facilities that treat, store, or dispose of hazardous waste. In addition, we discuss the availability of closure and postclosure insurance for these facilities and compare the costs of insurance for land disposal facilities with those we reported in our 1988 report. We also discuss the views of insurance providers and Environmental Protection Agency officials regarding the use of trust funds as an alternative mechanism to provide the financial assurance required under the Resource Conservation and Recovery Act. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of the report. We will then send copies to interested congressional committees, the Administrator of the Environmental Protection Agency, and others who are interested and will make copies available to other persons upon request. If you have any questions or would like additional information, please call me at (202) 512-2900 or Kwai-Cheung Chan, Director of Program Evaluation in Physical Systems Areas, at (202) 512-3092. Other major contributors to this report are listed in appendix III. Sincerely yours, Eleanor Chelimsky Assistant Comptroller General EXECUTIVE SUMMARY ============================================================ Chapter 0 PURPOSE ---------------------------------------------------------- Chapter 0:1 According to the Environmental Protection Agency (EPA), an estimated 275 million metric tons of hazardous waste are treated, stored, and disposed of annually in the United States, and the volume is growing. The Congress has become concerned about difficulties encountered by some hazardous waste treatment, storage, and disposal facilities in obtaining pollution insurance, one of the financial mechanisms allowed under the Resource Conservation and Recovery Act to meet financial responsibility requirements. Facilities unable to meet these requirements cannot legally continue operation, which raises concerns about the adequate handling of hazardous waste. To address this issue, Congresswoman Nancy L. Johnson of the Subcommittee on Health and Human Resources of the House Committee on Ways and Means asked GAO to determine what insurance companies provide pollution liability insurance and closure or postclosure insurance, the extent of coverage, and the coverage costs for both; update its October 1988 report on the cost and availability of pollution insurance to land disposal facilities; and determine the implications if state cleanup funds were made available to treatment, storage, and disposal facilities for pollution cleanup and for compensation to victims who have suffered pollution, bodily injury, or property damage. BACKGROUND ---------------------------------------------------------- Chapter 0:2 To address the problem of adequately treating, storing, and disposing of hazardous wastes, the Congress enacted the Resource Conservation and Recovery Act in 1976. The act and its amendments were intended to reduce the generation of hazardous waste and to minimize the present and future threat to human health and the environment. To comply with EPA regulations promulgated under the act, treatment, storage, and disposal facilities unless specifically exempted must demonstrate that they have the resources necessary to compensate third parties for bodily injury and property damage resulting while the facilities are in operation and after they have closed and no longer process or handle hazardous waste. Under the act, facilities can demonstrate their financial assurance for sudden (accidental) and nonsudden (gradual) damage through liability insurance, financial test (a demonstration of adequate assets), letter of credit, corporate guarantee, surety bond, trust fund, or any combination of these. For closure and postclosure financial assurance, facilities can use these mechanisms as well as closure and postclosure insurance. According to EPA, over 4,000 U.S. facilities treat, store, or dispose of hazardous waste. All these except the 445 federal and state treatment, storage, and disposal facilities are subject to the act's financial requirements. To address the issues raised by Congresswoman Johnson, GAO surveyed 674 treatment, storage, and disposal facilities randomly selected from EPA's nationwide listing and received responses from 76 percent. However, 28 percent of these had never operated as treatment, storage, and disposal facilities, and another 16 percent had ceased operating. GAO based its analysis on the 288 facilities that treated, stored, and disposed of waste in 1990 or 1991. (GAO's further investigation of nonrespondents found no reason to believe in any nonrespondent bias; see appendix II.) In addition, GAO interviewed officials from EPA and state environmental divisions and insurance commissions and representatives of insurance companies providing pollution liability insurance. RESULTS IN BRIEF ---------------------------------------------------------- Chapter 0:3 The majority of companies operating treatment, storage, and disposal facilities in 1991 that attempted to obtain pollution insurance found that it was difficult to obtain. GAO identified 24 insurance companies that provided pollution liability insurance in some form. The leading providers of insurance were the National Union Fire Insurance Company and the Planet Insurance Company. Zurich-American Insurance Company, one of the companies in the sample, also informed GAO that it planned to actively market pollution liability insurance in the near future. GAO found that closure and postclosure insurance was available to treatment, storage, and disposal facilities only under exceptional circumstances. About one third of treatment, storage, and disposal companies that are subject to the financial responsibility requirements of the act use liability insurance to cover accidental occurrences. About one quarter of these are land disposal facilities and are therefore also subject to the gradual coverage requirements. About one third of these, in turn, use liability insurance to meet this requirement. The more recently allowable alternative mechanisms are used substantially less than financial tests and insurance, and surety bonds are extremely rare. The difficulty experienced by land disposal companies in obtaining pollution insurance in 1991 has not significantly lessened since 1986. In 1991, an estimated 36 percent of companies used pollution liability insurance to cover accidental occurrences. In 1986, 32 percent reported obtaining this coverage. The cost of coverage increased approximately 29 percent during this period. About 50 percent of all treatment, storage, and disposal facilities reported that they would use state funds for cleanup if such funds were available. Conversely, insurance providers opposed the use of state funds as a financial mechanism for cleanup. One provider indicated that the availability of state funds would constitute direct competition from state governments. According to insurance providers, such competition would result in a reduction or elimination of coverage. GAO'S ANALYSIS ---------------------------------------------------------- Chapter 0:4 COST AND AVAILABILITY OF POLLUTION INSURANCE IN 1991 -------------------------------------------------------- Chapter 0:4.1 GAO found that the two originally accepted financial mechanisms, pollution insurance and financial test, remain the most frequently used forms of coverage and that more recently allowable mechanisms are used substantially less. For accidental coverage, more companies use insurance, while for gradual coverage, financial tests are more common. Most respondents to the survey reported great difficulty in obtaining pollution insurance, and 44 percent reported being denied insurance at least once over the past decade. In most cases, the reason was that their carriers were no longer underwriting pollution liability. GAO estimates that pollution insurance policies were issued to 755 facilities operated by 545 companies and that more than three quarters of them were written by one of the 24 insurance providers identified. The median cost of combined accidental and gradual coverage was $22 per thousand dollars of coverage, and miscellaneous additional costs were approximately $3 per thousand dollars of coverage. From its sample, GAO found only one instance of closure and postclosure insurance and this was provided through a wholly owned insurance company created by the treatment, storage, and disposal company. COMPARISON OF POLLUTION INSURANCE COST AND AVAILABILITY IN 1991 AND 1986 -------------------------------------------------------- Chapter 0:4.2 Survey respondents reported as high a level of difficulty in obtaining insurance in 1991 as they had in 1986. Land disposal companies continued to report that insurance companies were decreasing their pollution insurance exposure. GAO estimates that the median cost of combined accidental and gradual insurance coverage has increased from slightly under $20 to more than $25 per thousand dollars of combined coverage since 1986. The extension of acceptable financial assurance mechanisms to include other forms has failed to decrease the dependence of land disposal companies on insurance. In addition, more of these companies appear to be opting for fronting policies, which offer little true coverage since they leave the financial burden of third party cleanup with the treatment, storage, and disposal facility. IMPLICATIONS OF USING STATE FUNDS -------------------------------------------------------- Chapter 0:4.3 Over 50 percent of all survey respondents indicated that they would use state funds as a financial assurance mechanism if such funds were available. Smaller facilities reported considerably more interest than larger ones. Over 59 percent of facilities with a net worth of $100 million or less reported that they would use state funds, while only 26 percent of facilities with a net worth greater than $100 million would use these funds. Some state officials said they believe that state cleanup funds would work if an equitable funding method were developed to assess common fees. Insurance company representatives, however, indicated that the use of state funds might result in a reduction in policy coverage and higher premiums. One of the three insurance providers interviewed indicated that states should not provide funds because doing so would be providing taxpayer support to private treatment, storage, and disposal facilities. The provider also claimed that states are not qualified to underwrite insurance. Another provider commented that the availability of state funds may drive some pollution liability insurance providers out of business. RECOMMENDATIONS ---------------------------------------------------------- Chapter 0:5 GAO is not making any recommendations in this report. AGENCY COMMENTS ---------------------------------------------------------- Chapter 0:6 GAO discussed the report's contents with responsible agency officials and incorporated their comments where appropriate. GAO did not obtain official agency comments on a draft of this report. INTRODUCTION ============================================================ Chapter 1 BACKGROUND ---------------------------------------------------------- Chapter 1:1 Reports of potentially disastrous accidents involving the treatment, storage, and disposal of hazardous waste have commonly occurred in recent years as the government attempts to deal with ever increasing volumes of waste. Moreover, the growth in the production of waste has not been mirrored by growth in waste management. As a result, concern has emerged about safe handling. Part of the multipronged approach of the Congress to reducing the threat to human health and the environment posed by toxic substances was the enactment of the Resources Conservation and Recovery Act of 1976, with the objective, among others, of regulating the treatment, storage, transportation, and disposal of hazardous wastes. The act defined hazardous waste as "a solid waste, or combination of solid wastes, which because of its quantity, concentration, or physical, chemical, or infectious characteristics may . . . cause, or significantly contribute to an increase in mortality or an increase in serious irreversible, or incapacitating reversible, illness; . . . or pose a substantial hazard to human health or the environment when improperly treated, stored, transported, or disposed of, or otherwise managed." In order to accomplish the objectives of the act, the Congress authorized the administrator of the Environmental Protection Agency (EPA) to issue regulations regarding the financial responsibility of treatment, storage, and disposal (TSD) facilities as EPA might find necessary or desirable. To comply with the regulations, TSD facilities have relied on the various allowable financial mechanisms or combination of mechanisms, such as financial test, letters of credit, and pollution liability insurance. However, a 1988 GAO survey disclosed that TSD facilities have had difficulty obtaining insurance coverage for damage caused by hazardous waste. TSD facilities unable to demonstrate adequate financial responsibility cannot legally continue to operate. We concluded from these findings that without such assurances from the TSD facilities, the nation's ability to manage and safely dispose of hazardous waste under the present regulatory system may be seriously jeopardized. A member of the Subcommittee on Health and Human Resources of the House Committee on Ways and Means asked us to reexamine the availability and cost of pollution liability insurance to TSD facilities and to update the data from our 1988 report on pollution coverage for land disposal facilities. The present report responds to that request and also discusses industry and government officials' views on whether state funds are a viable option for providing required financial assurances, as they are with underground tanks used to store potentially harmful substances (discussed later in this section). LIABILITY REQUIREMENTS FOR OPERATING TSD FACILITIES -------------------------------------------------------- Chapter 1:1.1 When the Congress enacted the Resource Conservation Recovery Act in 1976, it mandated that the administrator of EPA issue regulations that included in its standards for hazardous waste TSD facilities "such additional qualifications as to . . . financial responsibility as may be necessary or desirable." Under 40 C.F.R. 264.147, these requirements were defined as liability coverage for bodily injury and property damage to third parties resulting from sudden, accidental and nonsudden, gradual occurrences from a facility's operations. Under regulations promulgated in 1982, this coverage may take the form of a liability insurance policy, a demonstration of assets adequate to provide EPA with assurances of financial responsibility (financial test), or a combination of the two. In 1986, EPA added a third method: a corporate guarantee by a parent company that may be used with insurance. In September 1988, EPA once more expanded the range of financial options by accepting letters of credit, surety bonds, trust funds, and nonparent company guarantees. Any of these mechanisms or a combination may be used to demonstrate financial responsibility. Under EPA regulations, owners or operators of hazardous waste TSD facilities are required to demonstrate--firm by firm--liability coverage for sudden and accidental pollution incidents (such as tank rupture or explosion) of at least $1 million per occurrence, with an annual aggregate of at least $2 million. In addition, owners or operators of land disposal facilities--that is, landfills, surface impoundments, and land treatment facilities--are required to demonstrate coverage for gradual pollution incidents (for example, long-term seepage into a drinking water supply) of at least $3 million per occurrence, with an annual aggregate of at least $6 million. Total coverage for land disposal facilities is therefore at least $4 million per occurrence, with an annual aggregate of at least $8 million. The amounts of coverage required apply to the owners or operators for all facilities, not separately to each facility. FINANCIAL ASSURANCE REQUIREMENTS FOR CLOSURE AND POSTCLOSURE OF TSD FACILITIES -------------------------------------------------------- Chapter 1:1.2 Financial assurance required under the act for closure and postclosure of facilities is outlined under 40 C.F.R. 264.143, 265.143, 264.145, and 265.145. According to the regulations, owners or operators of hazardous waste TSD facilities must develop plans for closing their facilities. During the closure period, landfills are covered or capped, and equipment, structures, and soil are disposed of or decontaminated. TSD facilities must provide financial assurance to ensure that possible problems stemming from closure activities can be adequately addressed. The financial assurance options available to them for closure are closure insurance, financial test, trust fund, surety bond, letter of credit, and corporate guarantee or any combination of these. The amount of financial assurance that must be demonstrated is based on the cost estimates for closure at the point in the facility's operating life when closure would be the most expensive. Postclosure financial assurance applies only to land disposal facilities (for example, landfills, surface impoundments, and land treatments) and is normally for a 30-year period after closure. During this time, monitoring and maintenance activities are conducted by owners and operators to preserve the integrity of the disposal system. The regulations require that owners or operators of disposal facilities must also establish a plan for postclosure and financial assurance for postclosure care. Cost estimates for postclosure monitoring and maintenance are based on projected costs for the entire postclosure period and are adjusted annually for inflation. The options available for postclosure are postclosure insurance, financial test, trust fund, surety bond, letter of credit, corporate guarantee, or any combination. UNDERGROUND STORAGE TANK PROGRAM -------------------------------------------------------- Chapter 1:1.3 The underground storage tank (UST) program is similar to the program for hazardous waste TSD facilities in that it is designed to ensure that releases of regulated substances do not threaten human health and the environment.\1 Like the program for hazardous waste TSD facilities, this program allows a variety of mechanisms to be used to meet financial assurance requirements. However, it also makes available the use of state cleanup funds. The UST program, enacted to control and prevent leaks from underground storage tanks, is broad in scope and encourages states to develop regulatory programs for these tanks. According to EPA, there were about 1.4 million underground storage tanks in 1990, the vast majority of which are used to store petroleum products. Less than 5 percent store hazardous substances. UST regulations permit states to assume liability costs and use their funds for required corrective action, thus providing an additional mechanism to UST owners and operators for demonstrating financial responsibility. Unlike other programs under the act, the UST program regulations apply to petroleum products as well as to regulated waste. Program regulations also mandate that underground tanks meet specific corrosion, installation, piping, and overfill prevention requirements. As of June 1992, 29 states (58 percent) had EPA-approved state cleanup funds for UST programs that reimburse cleanup or pay third party liability claims. These programs are financed by tank registration fees and other fees on gasoline and other petroleum products paid by UST operators and owners into the fund. In general, to qualify for reimbursement of state cleanup funds and liability costs, UST owners and operators must comply with applicable state and federal regulations. UST requirements are less stringent than TSD facility financial assurance requirements, allowing a broader range of financial mechanisms. Under UST regulations, financial assurance is required to cover both the cost of any required corrective action and compensation for third party liability from accidental releases. Per-occurrence coverage is set at either $500,000 or $1 million, depending on the nature of the facility operation and the quantity of the product being handled. Aggregate coverage is set at $1 million or $2 million, depending on the number of USTs to be covered. EPA's regulations divide tank owners into four categories based on the number of tanks they own. Owners of 1,000 or more tanks had to comply with EPA's financial responsibility requirements by January 1989. Owners of at least 100 but fewer than 1,000 tanks had to comply with this requirement by October 1989. Finally, owners of fewer than 100 tanks and most nonmarketers--that is, owners who do not market petroleum products and who have a tangible net worth of less than $20 million--had until December 31, 1993, to comply. According to an EPA official, EPA had extended this compliance deadline from October 26, 1991. Owners and operators of underground storage tanks may comply with financial assurance requirements in a number of ways, including all those allowed for TSD facilities. Other allowable mechanisms are risk retention group coverage and state assurance. Risk retention groups are unique in that the individual risks of group members are transferred to a risk pool administered by the group. If state assurance is used, the state agrees to provide the required corrective action and assume liability costs. Owners or operators usually pay a premium to the state for both types of coverage. -------------------- \1 Underground storage tanks regulated under the UST program are defined as tanks that have at least 10 percent of their volume below ground. OBJECTIVES, SCOPE, AND METHODOLOGY ---------------------------------------------------------- Chapter 1:2 The objectives of this report were established by the request of Congresswoman Nancy L. Johnson, committee member of the Subcommittee on Health and Human Resources of the House Committee on Ways and Means. She asked us to obtain information on the following subjects: 1. the number of insurance companies that offer pollution liability insurance; 2. the cost associated with pollution insurance, including premiums, deductibles, co-payments, and the costs of complying with paperwork and other requirements; 3. specific coverage of the policies and whether there are preconditions (for example, environmental site assessment to prove a clean site) for obtaining coverage; 4. differences in the availability of insurance and its cost across different operating facilities and among those seeking closure and postclosure insurance; 5. Changes in the cost and availability of pollution insurance since GAO's 1988 report; 6. the implications for private insurers if state funds were to be considered an allowable mechanism to demonstrate financial responsibility under subtitle C of the act. To address these subjects, we developed a questionnaire and sent it to 674 randomly selected facilities identified by EPA as sites treating, storing, or disposing of hazardous wastes. This sample was selected from a universe of 3,925 TSD facilities. We also interviewed officials from state insurance commissions in 9 states, state TSD and hazardous waste branches and departments in 8 states, and officials at EPA headquarters and regional offices. Finally, we interviewed officials representing five pollution insurance companies identified most frequently as providing coverage to the TSD facilities in our sample. Two of these were National Union Fire Insurance Company (a member of the American International Group) and Planet Insurance Company (a member of the Reliance Insurance Group). A third provider we interviewed, Zurich-American Insurance Company, does not presently market pollution insurance but planned to actively market it in the near future. The two other company officials we interviewed indicated that they did not actively market pollution liability insurance. These companies accommodate a few selected policyholders with pollution insurance; however, these are usually firms that carry other types of coverage. We selected the 9 states on the basis of the number of TSD facilities that EPA identified. First, we ranked the 50 states and the District of Columbia by the number of their TSD facilities. Then we selected the three having the most facilities (California, Pennsylvania, and Texas), the middle 3 states (Colorado, Minnesota, and Mississippi), and the 3 states having the smallest number of facilities (Alaska, Nevada, and Vermont).\2 We used a survey of TSD facilities as the basic design for this study because work performed for our 1988 report demonstrated that, although we might obtain useful information from our interviews with industry and government officials, only owners and operators of TSD facilities could provide the data needed to fully address the evaluation questions. To help maximize our response rate, we guaranteed confidentiality to our respondents. We also contacted most of the TSD facilities to verify addresses and to encourage them to respond to the questionnaire. We drew our sample from EPA's listing of 4,370 TSD facilities, having subtracted the 445 state and federal facilities that are exempt from the financial assurance requirements. Then we mailed our questionnaire to a stratified random sample of 674 TSD facilities drawn from the remaining 3,925 facilities.\3 Upon receipt of the questionnaire responses, however, we found that EPA's listing at that time overstated the universe of operational TSD facilities by approximately 28 percent.\4 Therefore, we estimated the actual number of nonstate and nonfederal TSD facilities to be 2,915 and adjusted the estimates in this report accordingly. We received 512 responses from our sample for an overall response rate of 76 percent. We performed a nonrespondent analysis on the basis of size and type of facility and geographic location. We concluded that nonrespondents do not differ substantially from respondents in these dimensions and that the nonrespondent group contains approximately the same percentage of TSDs as the respondent group. Our questionnaire is reprinted in appendix I. The details of our nonrespondent analysis appear in appendix II. Analysis of questionnaire information, supported by the information from our interviews, is the basis for chapter 2, which addresses the first four questions on availability and cost of pollution coverage. Chapter 3 provides an update of our 1988 report, and chapter 4 addresses the final question regarding state funds. We conducted our evaluation from July 1991 through October 1992 in accordance with generally accepted government auditing standards. -------------------- \2 We initially included the District of Columbia and South Dakota in the bottom 3, but they were eliminated because the District of Columbia does not have any TSD facilities and South Dakota has only one. Including South Dakota, therefore, would have hampered our ability to provide confidentiality. \3 The sample was stratified to ensure coverage of states with varying levels of financial assurance requirements and of both land disposal and nonland disposal facilities. \4 Our TSD list was derived from EPA's Hazardous Waste Database Management System (HWDMS), established in 1980, supplemented with the Resource Conservation and Recovery Information System (RCRIS), the new information system to which EPA was converting. We found similar overestimates of the TSD universe in HWDMS and RCRIS. LIMITATIONS OF OUR STUDY ---------------------------------------------------------- Chapter 1:3 We discussed our estimate of the TSD universe size with EPA officials at the conclusion of our data analysis. The conversion to the Resource Conservation and Recovery Information System had been completed by then, and they suggested that if we were to create a new sample based on the updated information now contained in the system, our estimate of the number of facilities would be somewhat larger. We did not independently verify this assertion. Secondly, our survey attempted to identify the difficulties experienced by TSD operators in obtaining pollution insurance. It does not allow us to estimate to what extent the reluctance of insurers to provide coverage to individual TSDs is based upon legitimate concerns over operating conditions at TSDs or the financial stability of the owner. It is most likely the case that some TSDs that have gone out of business because they could not find insurance were not operating in a manner that provided the assurance of pollution avoidance intended by the Resource Conservation and Recovery Act. AGENCY COMMENTS AND OUR RESPONSE ---------------------------------------------------------- Chapter 1:4 As noted above, we discussed our findings with EPA officials and have included their comments where appropriate. We did not obtain written comments on a draft of this report. COST AND AVAILABILITY OF POLLUTION INSURANCE IN 1991 ============================================================ Chapter 2 In this chapter, we first discuss the extent to which insurance and the other financial assurance mechanisms allowable under the Resource Conservation and Recovery Act are used by TSD companies. We then focus on the availability of pollution insurance as measured in the terms of the first four evaluation questions: (1) the number of insurers offering pollution liability insurance, (2) the costs of such insurance, (3) the extent of coverage offered, and (4) differences in the availability of insurance for third party liability during operation and for closure and postclosure liability. We also discuss other indicators of insurance availability--namely, how survey respondents characterized the difficulty they experienced in obtaining pollution insurance and how frequently they were unable to obtain insurance. We discuss the questions of insurer supply and insurance cost and coverage first as they relate to coverage for operating TSD companies and then in relation to TSD companies seeking closure and postclosure insurance. Finally, we report on differences in insurance availability between large and small TSD companies. Our findings are derived from our survey of the sample of TSD companies. In most cases, we report our findings in terms of companies, since financial responsibility requirements fall on the owner or operator company, not the individual facilities. However, where appropriate we report some findings on the facility level. THIRD PARTY LIABILITY COVERAGE FOR OPERATING TSD COMPANIES ---------------------------------------------------------- Chapter 2:1 FINANCIAL ASSURANCE MECHANISMS USED FOR ACCIDENTAL COVERAGE -------------------------------------------------------- Chapter 2:1.1 Of the seven financial mechanisms allowed under the act to meet financial assurance requirements for accidental coverage, we found that the pollution liability insurance mechanism was the most frequently used for TSD operations, followed by the financial test mechanism. Thirty-one percent of companies used liability insurance alone, and another 7 percent used insurance in combination with other mechanisms. Financial tests were used alone some 29 percent of the time and in combination with other mechanisms another 6 percent of the time. Most of the remaining companies used other assurance mechanisms either singly or in combination to meet financial assurance requirements. Twenty-two percent of companies made use of the new forms of coverage allowed since 1986.\1 Despite their acceptability to EPA, however, less than 1 percent of companies used a surety bond to meet financial responsibility requirements for accidental coverage.\2 Almost 8 percent had no liability coverage. Figure 2.1 shows the assurance mechanisms used to demonstrate liability coverage for accidental occurrences. Figure 2.1: Financial Assurance Mechanisms for Accidental Coverage (See figure in printed edition.) -------------------- \1 These include parent company guarantee, letter of credit, surety bond, trust fund, and nonparent company guarantee. \2 During our interviews in preparation for our 1988 report, surety officials took the position that pollution liability was inherently unbondable. This position appears to remain essentially unchanged. FINANCIAL ASSURANCE MECHANISMS USED FOR GRADUAL COVERAGE -------------------------------------------------------- Chapter 2:1.2 For gradual coverage, 32 percent of TSD companies used the financial test for the coverage and 35 percent used liability insurance. Twenty percent of companies used the more recently allowable coverage mechanisms, but none used surety bonds. Figure 2.2 shows the assurance mechanisms used to demonstrate liability coverage for gradual occurrences. Figure 2.2: Financial Assurance Mechanisms for Gradual Coverage (See figure in printed edition.) AVAILABILITY OF POLLUTION INSURANCE -------------------------------------------------------- Chapter 2:1.3 NUMBER OF INSURERS ------------------------------------------------------ Chapter 2:1.3.1 A total of 24 insurance companies provided pollution liability coverage to companies operating TSD facilities in our survey. We cannot be sure that all insurers were captured in our sample. Nevertheless, because of the diversity built into our sample design, it is unlikely that any major pollution insurer failed to be represented.\3 The coverage offered by these insurance companies included both single and multiple facility coverage. In some cases, it was provided as separate pollution insurance coverage; in others, pollution liability was covered as part of a comprehensive general liability (CGL) policy. In some cases, coverage was provided through "fronting" policies, policies whose coverage is only nominal inasmuch as their deductible amount is equal to the coverage offered.\4 Table 2.1 shows the number of insurers and the types of coverage they provided to companies operating TSD facilities in our survey. Table 2.1 Number of Insurers Providing Accidental, Gradual, and Combined Coverage in 1991\a Accidental Gradual Combined Type of coverage coverage coverage coverage ------------------------ ---------- ---------- ---------- Single facility 11 0 7 Multiple facility 7 1 5 Comprehensive general 8 0 4 liability Fronting policy 2 2 3 ------------------------------------------------------------ \a Some insurers provide more than one type of coverage. Despite the number of insurers providing pollution liability coverage, the pollution insurance market is dominated by a very few companies. National Union Fire Insurance Company of Pennsylvania, a member of the American International Group, provides nearly 77 percent of the coverage identified by our survey, and Planet Insurance Company provides another 4 percent. The remaining coverage is spread among the 22 other companies identified by respondents. -------------------- \3 Our sample was stratified to ensure representation of land disposal and nonland-disposal TSD facilities from states that maintained different degrees of regulatory stringency. \4 Fronting policies do not transfer risk from the insured to the insurance companies for this reason. Insurance companies sometimes limit their risk by requiring that the insured company provide a letter of credit equivalent to the coverage. NUMBER OF POLICIES ------------------------------------------------------ Chapter 2:1.3.2 We estimate that pollution liability insurance policies covering 755 TSD facilities operated by 545 companies were issued in 1990-91. The majority of policies combined accidental and gradual coverage, while 196 companies had accidental coverage alone. We found no instances of gradual coverage unaccompanied by accidental pollution insurance. COSTS OF COVERAGE -------------------------------------------------------- Chapter 2:1.4 PREMIUMS AND OTHER COSTS ------------------------------------------------------ Chapter 2:1.4.1 The costs of insurance reported by our respondents varied widely, as would be expected given the varying nature and volume of the hazardous waste they generate and store and the range in size of their operations. The median premiums paid in 1991 for $1,000 of sudden and accidental, gradual, and combined coverage were $37.00, $22.31, and $22.00, respectively. Few survey respondents reported paperwork or other nonpremium costs of obtaining insurance. Of those who did, the median additional cost reported was $3.22 for each $1,000 of annual aggregate coverage. DEDUCTIBLES ------------------------------------------------------ Chapter 2:1.4.2 The deductibles reported by respondents ranged from $5,000 to an amount equal to that coverage. The latter case represents "fronting coverage," which is discussed above. The median policy's deductible was 10 percent of the per occurrence coverage, or $100,000 of the $1 million coverage required by the act. EXTENT OF COVERAGE -------------------------------------------------------- Chapter 2:1.5 We estimate that the total annual aggregate coverage for 1991 in the United States amounted to $3.1 billion. The total annual aggregate coverage for the accidental, gradual, and combined policies was $524,826, $119,422, and $3,087,451, respectively. Insurance policies often include various exclusions to coverage that limit insurance company liability. Insurance companies also often require that insurance applicants submit to preconditions before they are provided pollution liability coverage, such as improved safety and security measures. The policy exclusions most frequently identified by the facilities that purchased insurance were radioactive and toxic materials (80.7 percent of facilities); preexisting conditions, or pollution conditions that existed prior to the inception of the policy (70.1 percent of facilities); and asbestos (50.6 percent of facilities). Policy exclusions reported by our respondents are outlined in figure 2.3. Figure 2.3: Exclusions for Accidental and Gradual Coverage (See figure in printed edition.) Note: PCBs are polychlorinated biphenyls. Of the facilities that obtained insurance, the preconditions required most frequently by insurance companies were environmental assessments (80.1 percent of the time), site inspections (54.8 percent of the time), and verification of acceptable management practices such as improving safety and security measures (49.6 percent of the time).\5 Policy preconditions are shown in figure 2.4. Figure 2.4: Preconditions for Accidental and Gradual Coverage (See figure in printed edition.) -------------------- \5 Environmental assessments are audits generally performed by engineering firms to determine risk associated with coverage. DIFFICULTIES OBTAINING POLLUTION LIABILITY INSURANCE -------------------------------------------------------- Chapter 2:1.6 Our questionnaire responses show that companies had difficulty obtaining pollution liability insurance at a fair price. We estimate that nearly two thirds of TSD companies attempted to obtain pollution insurance between 1982 and 1991 and 44 percent of these were denied insurance at least once. Of our respondents who had been denied insurance during this period, 86.9 percent reported it was very difficult or nearly impossible to obtain the coverage required by the act, and 90.9 percent reported extreme difficulty obtaining an acceptable range of liability coverage (that is, coverage for the various types of activities the facilities are involved in). Figures 2.5 and 2.6 show the degree of difficulty reported by these respondents. Figure 2.5: Difficulty Obtaining an Adequate Amount of Pollution Liability Insurance Coverage (See figure in printed edition.) Figure 2.6: Difficulty Obtaining Pollution Liability Insurance With an Acceptable Range of Liability Coverage (See figure in printed edition.) NUMBER OF TIMES DENIED POLLUTION LIABILITY INSURANCE -------------------------------------------------------- Chapter 2:1.7 We estimate that 308 companies that were operating in 1991 had attempted to obtain pollution liability insurance at some time between 1982 and 1991. These companies were denied coverage almost 1,500 times during this period (an average of about 4.8 times per company). Fewer than half of these companies had pollution insurance in 1991. REASONS FOR DIFFICULTY OBTAINING POLLUTION LIABILITY INSURANCE -------------------------------------------------------- Chapter 2:1.8 The primary reasons that companies reported they had trouble getting pollution insurance or were denied pollution liability insurance were that (1) liability coverage was not available (71.4 percent) and (2) the carrier informed them or their agent that it was getting out of the pollution liability insurance business (64.2 percent). Figure 2.7 shows the reasons cited to TSD companies that had trouble getting insurance or were denied insurance. Figure 2.7: Reasons for Difficulty Obtaining Liability Insurance (See figure in printed edition.) CLOSURE AND POSTCLOSURE INSURANCE ---------------------------------------------------------- Chapter 2:2 We also collected information on the types of financial assurance mechanisms used by TSD companies to meet the closure and postclosure financial requirements of the act. In this section, we provide our estimates of companies using each allowable closure and postclosure mechanism and the costs and difficulties associated with obtaining closure and postclosure insurance. FINANCIAL ASSURANCE MECHANISMS USED FOR CLOSURE AND POSTCLOSURE REQUIREMENTS -------------------------------------------------------- Chapter 2:2.1 About 38.9 percent of TSD companies used the financial test alone or in combination with other mechanisms, 25.3 percent used letters of credit alone or in combination with other mechanisms, and 14.2 percent used parent company guarantees singly or in combination, whereas only 1.5 percent used closure and postclosure insurance to comply with financial responsibility requirements. The remaining respondents used some other mechanism such as surety bonds and trust funds or a combination of mechanisms (excluding closure and postclosure insurance) or had no coverage. Figure 2.8 shows the assurance mechanisms used singly or in combination to demonstrate closure and postclosure coverage for 1991. Figure 2.8: Financial Assurance Mechanisms Used to Demonstrate Closure and Postclosure Coverage (See figure in printed edition.) AVAILABILITY OF CLOSURE AND POSTCLOSURE INSURANCE -------------------------------------------------------- Chapter 2:2.2 NUMBER OF INSURERS ------------------------------------------------------ Chapter 2:2.2.1 Our survey identified only one insurance company that provided closure or postclosure insurance. This company did not market such insurance to TSD companies generally. Rather, it had been created by a TSD company as a wholly owned subsidiary to provide pollution insurance only to its affiliated companies. Our interviews with insurance providers reinforced the scarcity of closure and postclosure insurance providers. We asked the leading providers of pollution liability insurance which companies provided closure and postclosure coverage, and none could identify companies that marketed this type of coverage. COST AND EXTENT OF COVERAGE ------------------------------------------------------ Chapter 2:2.2.2 Only 5 active companies reported having obtained closure or postclosure insurance, all with the same insurer. Only 3 of these provided coverage and premium information, 1 for closure insurance and 2 for combined closure and postclosure coverage. The closure insurance coverage was for $500,000, at a cost of $14.73 per thousand. Combined coverage was reported for $1.5 million and $1.4 million, at a cost of $66.67 and $38.50 per thousand, respectively. From such a small sample, we cannot form reliable estimates of total coverage in the nation or average costs. DIFFICULTY OBTAINING CLOSURE AND POSTCLOSURE INSURANCE ------------------------------------------------------ Chapter 2:2.2.3 Only a few companies even attempted to obtain closure and postclosure insurance, and those that did had little success. Only 20 percent of companies attempted to obtain this coverage; 86 percent reported that it was very difficult to nearly impossible getting adequate amounts of coverage to comply with requirements, and 98 percent reported similar difficulty obtaining an adequate range of coverage. Figures 2.9 and 2.10 show the degree of difficulty these respondents experienced attempting to obtain coverage. Figure 2.9: Difficulty Obtaining Adequate Closure and Postclosure Insurance (See figure in printed edition.) Figure 2.10: Difficulty Obtaining Closure and Postclosure Insurance With an Acceptable Range of Liabilities (See figure in printed edition.) REASONS FOR DIFFICULTY IN OBTAINING CLOSURE AND POSTCLOSURE INSURANCE -------------------------------------------------------- Chapter 2:2.3 Our respondents reported that the difficulty they encountered in obtaining closure and postclosure insurance resulted primarily because closure and postclosure insurance was simply not available; the insurance companies they contacted no longer provided such coverage, if they ever had. COMPANY SIZE AND POLLUTION LIABILITY COVERAGE -------------------------------------------------------- Chapter 2:2.4 We examined responses we received to our questionnaire for differences related to company size. Nearly half of TSD companies had annual sales over $50 million during 1990, most of them over $100 million. Figure 2.11 shows the distribution of annual sales for companies in 1991. Figure 2.11: Annual Sales of TSD Companies (See figure in printed edition.) We found that companies with sales over $50 million were significantly more likely than smaller companies to meet requirements for operating TSD companies through financial tests. Nearly half of all larger companies used financial tests, while only one seventh of companies with sales under $50 million did. Smaller companies were more likely to use insurance (representing two thirds of all insurance users), a parent company guarantee (70 percent), letter of credit (85 percent), or trust fund (64 percent) or to have no coverage (77 percent). Figure 2.12 displays the different mechanisms used by large and small companies. Figure 2.12: Financial Mechanisms Used by Large and Small Companies (See figure in printed edition.) Other size-related differences also existed. Smaller companies reported greater difficulty in obtaining an acceptable range of coverage than did larger companies (although both reported great difficulty). Size differences are also related to whether, when, and why facilities closed. Facilities operated by smaller companies were less likely to have been active at the time of our survey, and to have closed sooner, than those operated by larger companies. Smaller companies were more likely to cite the difficulty of meeting the act's financial requirements as the reason for closing than larger companies and were less likely to cite nonfinancial requirements (such as paperwork) as a reason for closing. SUMMARY ---------------------------------------------------------- Chapter 2:3 We found 24 insurers offering some form of pollution liability insurance. Two insurers, however, dominate the pollution insurance market, providing 81 percent of coverage. We estimate total TSD pollution liability exposure at $3.1 billion. The average cost of combined accidental and gradual insurance is approximately $22 per $1,000 of annual aggregate coverage. Most respondents to our survey reported great difficulty in obtaining pollution insurance, and nearly half of those who sought insurance over the past decade reported being denied coverage at least once. In most cases, the reason cited for this difficulty was that their carriers were no longer underwriting pollution liability. For closure and postclosure requirements, most TSD companies use financial tests to meet the legislative requirements. The insurance mechanism is not a real alternative for most companies; less than 2 percent of companies use it. Finally, coverage availability appears to be related to company size. Only a quarter of small companies use financial tests. The others rely heavily on insurance and, less so, on the more recently allowable financial mechanisms. While nearly all companies reported serious difficulty in obtaining pollution insurance, small companies were significantly more likely to report difficulty than larger companies. POLLUTION INSURANCE COST AND AVAILABILITY FOR LAND DISPOSAL COMPANIES IN 1991 AND 1986 ============================================================ Chapter 3 Our 1988 report dealt with the availability of pollution insurance solely for land disposal facilities and was concerned with operational coverage, not with closure or postclosure coverage. The current report responds to a broader request--namely, to examine the availability of insurance for all TSD facilities (not just those categorized as land disposal facilities) and for both types of coverage.\1 In chapter 2, we discussed these issues as they pertain to all TSD companies and, with respect to land disposal companies, we presented the findings from our 1991 survey regarding the cost and availability of gradual pollution insurance, the additional form of coverage required of this group of TSD companies. In this chapter, we compare these findings with the information we developed from our 1986 survey of land disposal facilities. We discuss respondent data on accidental and gradual coverage, including annual sales of land disposal companies, the financial mechanisms used to meet requirements under the Resource Conservation and Recovery Act, number of accidental and gradual policies issued, amount and cost of coverage, use of fronting policies, difficulties facilities have obtaining coverage, and information on exclusions and preconditions to coverage. -------------------- \1 For the definition of land disposal facilities and a summary of their more stringent liability coverage requirements, see chapter 1. ANNUAL SALES FOR LAND DISPOSAL COMPANIES ---------------------------------------------------------- Chapter 3:1 The size of land disposal companies does not appear to have changed substantially since 1986. About half of the companies in both our surveys reported annual sales below $50 million, half above that figure. Figure 3.1 presents annual sales of land disposal facilities for 1991 and 1986. Figure 3.1: Annual Sales of Land Disposal Companies (See figure in printed edition.) FINANCIAL ASSURANCE MECHANISMS USED BY LAND DISPOSAL COMPANIES ---------------------------------------------------------- Chapter 3:2 Since our last report, EPA regulations have expanded the range of available financial mechanisms to demonstrate TSD liability coverage. At that time, liability insurance and the financial test were the only mechanisms available to demonstrate coverage. After that time, financial test, liability insurance, parent company guarantee, letter of credit, surety bond, trust fund, and nonparent company guarantee became allowable. At our latest survey, financial test and liability insurance remained the most common financial mechanisms used by land disposal companies to comply with the act, amounting to nearly three quarters of all mechanisms used. In 1991, the financial test was used for accidental coverage by 31.9 percent of the companies, while liability insurance was used by 35.5 percent, and another 1.5 percent of companies used a combination of the two. Nearly 15 percent used parent company guarantees, and 2 percent used letters of credit for accidental coverage. We found no instances of surety bond use in our sample of land disposal companies. About 7 percent reported having no coverage. Similarly, for gradual coverage, 35.3 percent used financial tests and 31.6 percent used liability insurance. Some 15 percent of companies used parent company guarantees and about 2 percent used letters of credit. Figure 3.2 depicts the distribution of financial mechanism choices for accidental coverage in 1991 and 1986, and figure 3.3 compares gradual coverage mechanisms for the 2 years. These comparisons suggest that, if allowing the use of other financial assurance mechanisms was expected to alleviate the dependence on insurance, that expectation has been disappointed. The use of the insurance mechanism has remained relatively unchanged or even increased over the 5-year period. It appears that the more recently permissible forms of coverage have replaced financial tests and have not substantially affected the use of insurance. Figure 3.2: Mechanisms Used by Land Disposal Companies for Accidental Coverage (See figure in printed edition.) Note: The 1986 survey did not distinguish between sudden and gradual coverage. Figure 3.3: Mechanisms Used by Land Disposal Companies for Gradual Coverage (See figure in printed edition.) Note: The 1986 survey did not distinguish between sudden and gradual coverage. FRONTING POLICIES ---------------------------------------------------------- Chapter 3:3 A higher percentage of land disposal companies in 1991 reported the use of fronting policies to meet the act's requirements for liability coverage than were reported in 1986. We estimate that in 1991, 5.9 percent of land disposal companies used fronting policies to demonstrate coverage for accidental and gradual occurrences. In 1986, we found only 1.6 percent of companies using fronting policies. AMOUNT AND COST OF COVERAGE ---------------------------------------------------------- Chapter 3:4 In 1986, 70 policies insuring the companies we surveyed provided aggregate annual accidental coverage of $1.4 billion. Seventeen policies provided aggregate annual coverage for gradual occurrences of $212 million, and 57 policies provided a combined aggregate annual coverage of $1 billion. We estimate that in 1991, 37 land disposal companies had a total annual aggregate accidental coverage of $97.4 million. Fourteen companies had separate coverage totaling $129 million for gradual occurrences, and 160 companies had combined accidental and gradual occurrences of $1.1 billion. The median cost reported for this insurance was $25.41 for $1,000 of annual aggregate coverage, compared with the $19.63 per thousand we found for 1986.\2 -------------------- \2 The 1986 costs have not been adjusted for inflation, since they represent the cost for identical amounts of coverage as in 1991. Such an adjustment would make the 1986 and 1991 costs nearly identical but would not represent the diminished value of that coverage in 1991. DIFFICULTY OBTAINING POLLUTION LIABILITY INSURANCE ---------------------------------------------------------- Chapter 3:5 Our analysis suggests that land disposal companies in 1986 encountered similar difficulty in 1991 obtaining pollution liability insurance. We asked both sets of respondents to rank the degree of difficulty they had experienced in obtaining an adequate coverage amount and an acceptable range of coverage on a one-to-five scale representing ascending levels of difficulty. In our recent survey, land disposal companies assigned mean difficulty scores of 4.3 and 4.5 to these dimensions. Five years earlier, our respondents had reported scores of 3.9 and 4.0. According to respondents, the primary reasons that land disposal companies had trouble getting pollution liability insurance or were denied pollution liability insurance in 1991 were that insurance was not available and that the insurance carrier contacted was getting out of the pollution liability insurance business. In 1986, respondents reported similar reasons for their denial of insurance. EXCLUSIONS AND PRECONDITIONS ---------------------------------------------------------- Chapter 3:6 Our survey in 1986 revealed a wide variety of pollution insurance policy exclusions, including preexisting conditions and asbestos. In 1991, the exclusions most frequently identified by land disposal facilities were radioactive and toxic materials, preexisting conditions, and asbestos. SUMMARY ---------------------------------------------------------- Chapter 3:7 When we compare the results of our two surveys for the portion of TSD companies made up of land disposal facilities, we find that the availability and cost of pollution liability coverage has not eased since 1986 and may have become somewhat worse. It remains very difficult to obtain and, if available at all, it was in 1991 at least as costly as it had been in 1986. The extension of acceptable financial assurance mechanisms to include other forms has not tended to decrease the dependence of land disposal companies on insurance. In addition, more of these companies appear to be opting for fronting policies that offer little true coverage. IMPLICATIONS OF USING STATE CLEANUP FUNDS ============================================================ Chapter 4 In this chapter, we address our sixth evaluation issue: the implications of TSD facilities using state cleanup funds as a financial assurance mechanism under the Resource Conservation and Recovery Act. As we discussed in chapter 1, the UST program allows the use of such funds to meet its requirements that operators demonstrate their financial ability to clean up pollution damage from storage tank leaks and to pay third party liability claims. This financial assurance mechanism is not currently available to hazardous waste TSD companies. To address this issue, first we examined the specific provisions of the UST program and the current status of state cleanup fund use. Second, we surveyed TSD facility officials to determine whether they would use state cleanup funds if available to meet the financial assurance requirements. Third, we interviewed officials from 5 insurance companies on the effect state cleanup funds would have on their companies and the industry in general. Finally, we interviewed various state and EPA officials to obtain their views on the feasibility of creating state cleanup funds for use by TSD facilities for complying with the act's financial assurance requirements. In the following pages, we discuss how the states are implementing the state cleanup provisions of the UST program and we compare the relevant characteristics of TSD and UST facilities. Then we discuss the likelihood of TSD companies making use of this mechanism if it were allowed and how insurers and state officials view the desirability and feasibility of applying this UST provision to TSD facilities. UST USE OF STATE FUNDS ---------------------------------------------------------- Chapter 4:1 Owners and operators of underground storage tanks must meet federal financial assurance requirements just as for TSD facilities. However, a state cleanup fund is a mechanism made available by EPA to UST owners for demonstrating financial responsibility to cover cleanup and third party claims that is not available to TSD owners and operators. Many different sources can be used to finance a state fund. These include licensing and tank fees, bond issues, and risk-based premiums. The size of cleanup funds varies from state to state. For example, in 1991 Vermont's fund contained $200,000, whereas Colorado's fund contained $15 million. Before a state can use a cleanup fund as an alternative financial assurance mechanism, EPA must approve it. EPA requires the states to submit detailed plans specifying the funding source, the amount of the fund, coverage provided, eligibility for use of the fund, and sunset provisions. EPA must approve the proposed funds before owners and operators can use them to satisfy federal financial responsibility requirements. However, EPA may approve the state funds on an interim basis before final approval is given. According to EPA, as of June 1992, 29 states had EPA-approved UST cleanup funds to pay for cleanup and third party claims.\1 Figure 4.1 and table 4.1 show the states that have received EPA approval, the states that have submitted plans, those that have not submitted plans, and those that have no program. Figure 4.1: State Financial Assurance Fund Programs (See figure in printed edition.) Table 4.1 Status of State Financial Assurance Fund Programs as of June 1, 1992 Approved Submitted Not submitted No program ------------- ------------- ------------- --------------- Alabama California Alaska District of Columbia Arkansas Colorado Arizona Hawaii Connecticut Florida Delaware Maryland Georgia Kentucky Indiana New Jersey Illinois Nebraska Missouri New York Idaho Virginia Pennsylvania Oregon Iowa Wisconsin West Virginia Rhode Island Kansas Washington Louisiana Maine Massachusetts Michigan Minnesota Mississippi Montana Nevada New Hampshire New Mexico North Carolina North Dakota Ohio Oklahoma South Carolina South Dakota Tennessee Texas Utah Vermont Wyoming ============================================================ 29 7 7 8 ------------------------------------------------------------ Source: Environmental Protection Agency. Most states require that a deductible be met before funds are released. UST owners and operators must be in compliance with applicable state and federal regulations, including payment of applicable fees in some states, in order to receive state cleanup funds. -------------------- \1 Some cleanup funds such as that in Texas pay only for cleanup and not third party claims. COMPARISON OF TSD FACILITY AND UST PROGRAMS ---------------------------------------------------------- Chapter 4:2 Owners and operators of petroleum USTs may use a number of mechanisms to comply with financial assurance requirements, including all those allowed for TSD facilities: pollution liability insurance, financial test, letter of credit, and so on. Although some similarities exist between TSD facility and UST programs, they are overshadowed by the differences in the facilities regulated (for example, type of facility, population size, and substances handled). Table 4.2 shows the characteristics that make the TSD facility program different and more complex than the UST program. Table 4.2 Comparison of TSD Facility and UST Programs TSD program UST program ------------------ ------------------ -------------------- EPA authority RCRA, subtitle C\a RCRA, subtitle I\a Population size About 2,915 1,400,000 tanks that facilities that primarily store treat, store, and petroleum products dispose of hazardous waste Types of Diverse: many Homogeneous: similar facilities different types underground tanks regulated and sizes that that store petroleum treat, store, and and other products dispose of all hazardous waste Types of All hazardous Petroleum products substances handled waste (e.g., PCBs, (e.g., gasoline, asbestos, oil, and many radioactive and hazardous chemicals) toxic waste) ------------------------------------------------------------ \a RCRA = Resource Conservation and Recovery Act. LIKELIHOOD OF STATE CLEANUP FUND USE BY TSD FACILITIES ---------------------------------------------------------- Chapter 4:3 Overall, we found that about 50 percent of all TSD facilities would use state cleanup funds if they were available. TSD facilities with a tangible net worth of $50 million or less are the most likely to use state funds. Of those, 59.1 percent would use state cleanup funds. Of facilities with a tangible net worth between $51 million and $100 million, 59.6 percent would use the funds. Of facilities with a tangible net worth greater than $100 million, only 26 percent would use the funds. By projecting our sample data to the universe of TSD facilities, we estimate that about 1,064 facilities would use the state cleanup fund as a financial assurance mechanism. Moreover, of the 915 TSD facilities projected to use pollution insurance, 554 would probably use state cleanup funds if allowed as a financial assurance mechanism. Our survey also revealed that smaller TSD facilities (those with annual sales of $50 million or less) were less likely to use financial tests and more likely to depend on liability insurance and the more recently allowable mechanisms than were larger companies. (See chapter 2.) This finding is consistent with the comments by some respondents to our survey that state cleanup funds would more likely be used by smaller TSD facilities. VIEWS OF POLLUTION INSURANCE PROVIDERS ---------------------------------------------------------- Chapter 4:4 Our survey data show that the two major providers of TSD pollution liability insurance policies to our sample of TSD facilities were National Union Fire Insurance Company and Planet Insurance Company. A third, Zurich-American Insurance Company, recently entered the pollution insurance market and plans to actively underwrite pollution liability insurance. Three of the 5 companies interviewed do not favor the use of state cleanup funds for TSD facilities and believe that states should not implement state cleanup funds for TSD facilities. According to some insurance company representatives we interviewed, a reduction in policy coverage and higher premiums are potential effects if state cleanup funds are used by TSD facilities. One of the 3 providers indicated that the states should not provide state cleanup funds because a taxpayer-supported fund provides a disincentive for a private market solution to the protection of public health and the environment. The same provider also indicated that the states would be in the position of underwriting insurance and that they are not qualified to do this. Another of the 3 providers claimed that state funds constitute direct competition from the government and may drive some insurance providers out of business. Three of the 5 providers foresee a reduction or elimination of coverage if state funds are used by TSD facilities. VIEWS OF STATE ENVIRONMENTAL OFFICIALS ---------------------------------------------------------- Chapter 4:5 To obtain opinions on the viability of using state cleanup funds for TSD facilities, we selected TSD facility and UST officials from 9 states on the basis of the number of TSD facilities that EPA identified in those states. First, we ranked the 50 states and the District of Columbia by the number of TSD facilities in each state. Then we selected the 3 having the most facilities (California, Pennsylvania, and Texas), the middle 3 states (Colorado, Minnesota, and Mississippi), and the three states having the least number of facilities (Alaska, Nevada, and Vermont).\2 Some officials believe that state cleanup funds would be feasible if an equitable funding mechanism were developed (for example, a method by which a common fee could be assessed TSD facilities). However, these officials are not clear about how such funds would be collected. Four of the 8 TSD state officials we contacted indicated that state cleanup funds would be feasible under the TSD program and would assist smaller facilities in complying with the act's requirements if an equitable method of funding could be developed. According to these officials, some parallels exist between the UST and TSD programs, but a funding mechanism like that used for the UST program might not necessarily work for the TSD program. For example, the size of the UST state cleanup fund varies from state to state, with some states having funds of less than $15 million. However, according to EPA officials, a TSD facility cleanup fund would have to be considerably larger because one disaster could potentially wipe out the fund and because of the different substances handled by TSD facilities. Because of their limited knowledge about the UST program, three officials did not comment on the feasibility of using state cleanup funds for TSD facilities. Three of the 9 state UST officials we interviewed commented that state cleanup funds for TSD facilities would be feasible. Although some of these officials were not too familiar with TSD programs, some pointed out that because of common fees that can be levied against all tank owners, it would be easier to administer a state UST program than a more complicated TSD program. For example, under the UST program, although there are about 1.4 million tanks, those tanks generally contain petroleum products such as gasoline and oil. The TSD program, however, encompasses a multitude of facility types that treat, store, and dispose of a variety of substances such as PCBs, asbestos, or radioactive and toxic waste. -------------------- \2 California does not have authorization from EPA to implement the subtitle C program. Therefore, we obtained information from the EPA Region 10 office. SUMMARY AND CONCLUSIONS ---------------------------------------------------------- Chapter 4:6 More than half the states currently have EPA-approved state cleanup funds to cover the financial responsibility of UST owners and operators in the case of pollution damage. They are funded from various sources, and their size varies from state to state. Although the financial responsibility aspects of the UST program are in many ways similar to those of the regulations for TSD facilities, the differences among the programs, particularly in the types of facilities and the types of materials regulated, are substantial. For the most part, USTs simply store petroleum products. TSD facilities perform a number of different operations on a wide variety of hazardous wastes. If a state cleanup fund became an available financial assurance mechanism for TSD facilities, many TSD facilities, particularly smaller ones, would use them. Insurance companies, however, view such a mechanism as inappropriate government intrusion into the private marketplace and suggest that it would eventually result in the decreasing availability or increased cost of pollution insurance. While some state environmental officials believe that such a mechanism might be feasible and would help small TSD facilities, all agreed that a TSD state cleanup fund program would be much more difficult to design and administer than its UST analogue. We conclude, therefore, that because of the diverse types of TSD facilities and the wide range of hazardous wastes they treat, store, and dispose of, it will be difficult to establish an equitable funding system and reimburse TSD facilities for cleanup and third party claims. Any cleanup fund would have to take into account the variety of threats posed to public health and to the environment based on the type of contaminant and facility activities (treat, store, and dispose) so that fees would be assessed equitably. However, the development of a funding system would be complex, and its general acceptance within the hazardous waste community and by the general public would entail lengthy consultation and deliberation. (See figure in printed edition.)Appendix I QUESTIONNAIRE ============================================================ Chapter 4 (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) NONRESPONDENT ANALYSIS ========================================================== Appendix II We contacted 106 of the 162 nonrespondents to determine whether nonrespondents were TSD facilities or not. The remaining 56 facilities could not be contacted because of no forwarding addresses, unlisted numbers, and the like. We specifically contacted 68 nonrespondents from disposal and nondisposal facilities from the states having subtitle C regulations equivalent to EPA's. We also contacted 38 disposal and nondisposal facility nonrespondents from states with regulations more stringent than EPA's. EPA and state officials reported that 44 states had regulations equivalent to EPA's and 6 states had regulations more stringent than EPA's. Facilities were assigned the codes of EQD for equivalent disposal, EQN for equivalent nondisposal, MSD for more stringent disposal, and MSN for more stringent nondisposal. Our analysis shows that the nonrespondent data were similar to those for respondents. Thus, the similarities between respondents and nonrespondents make us confident that the nonrespondents would have provided similar data. Tables II.1 and II.2 show that of the 674 questionnaires mailed, we received 512 responses. Of this number, 368 (71.9 percent) were TSD facilities and 144 (28.1 percent) were not. The data also show that there were 162 nonrespondents. Of this number, we contacted 106 by phone and determined that 74 (69.8 percent) were TSD facilities and 32 (30.2 percent) were not. We were unable to contact the remaining 56 facilities. Table II.1 Questionnaire Respondents TSD Non-TSD Questionnaires respondent respondent Stratum mailed s s Total ------------ -------------- ---------- ---------- ------ EQN 218 133 44 177 EQD 216 117 41 158 MSN 134 59 39 98 MSD 106 59 20 79 ============================================================ Total 674 368 144 512 71.9% 28.1% ------------------------------------------------------------ Table II.2 Questionnaire Nonrespondents TSD Non-TSD Facilities facilities facilities not Stratum contacted Contacted contacted Total ---------- ------------ ------------ ------------ ------ EQN 22 5 14 41 EQD 26 15 17 58 MSN 15 8 13 36 MSD 11 4 12 27 ============================================================ Total 74 32 56 162 69.8% 30.2% ------------------------------------------------------------ From the 106 facilities, we also analyzed the range of annual sales for 57 of the nonrespondents that provided us with annual sales information. Our analysis shows that about 50 percent of the TSD facility nonrespondents had annual sales of less than $50 million. This percentage is similar to that reported by TSD facility respondents with annual sales of less than $50 million. Table II.3 shows the annual sales for nonrespondents in equivalent states (EQD and EQN) and for more stringent states (MSD and MSN). Table II.3 Annual Sales of Nonrespondents Less than $10- $51- More than Not Strat $10 $50 $100 $100 availabl Tota um million million million million e l ----- ------- ------- ------- ---------- -------- ---- EQD 6 4 1 4 3 18 EQN 6 6 2 5 3 22 MSD 0 2 1 3 0 6 MSN 4 2 1 3 1 11 ============================================================ Total 16 14 5 15 7 57 ------------------------------------------------------------ In addition, we determined the geographic location of respondents and nonrespondents by EPA region. The data show that the highest response rates were from Regions 7 and 8, both of which had a 90-percent or higher response rate. The lowest response rate was from Region 2. Table II.4 shows the geographic distribution of respondents and nonrespondents by EPA region. Table II.4 Geographic Location of Questionnaire Respondents and Nonrespondents Number Total of Number of questionnair response nonresponden Response EPA region\a es mailed s ts rate ------------ ------------ -------- ------------ -------- 1 172 135 37 78.5% 2 80 52 28 65.0 3 111 82 29 73.9 4 68 50 18 73.5 5 109 86 23 78.9 6 49 36 13 73.5 7 26 24 2 92.3 8 10 9 1 90.0 9 35 27 8 77.1 10 14 11 3 78.6 ============================================================ Total 674 512 162 76.0% ------------------------------------------------------------ \a For states included in each region, see table II.5. Table II.4 EPA Regions Region State ------------------ ---------------------------------------- 1 Connecticut Maine Massachusetts New Hampshire Rhode Island Vermont 2 New Jersey New York Puerto Rico 3 Delaware District of Columbia Maryland Pennsylvania Virginia West Virginia 4 Alabama Florida Georgia Kentucky Mississippi North Carolina South Carolina Tennessee 5 Illinois Indiana Michigan Minnesota Ohio Wisconsin 6 Arkansas Louisiana New Mexico Oklahoma Texas 7 Iowa Kansas Missouri Nebraska 8 Colorado Montana North Dakota South Dakota Utah Wyoming 9 Arizona California Hawaii Nevada 10 Alaska Idaho Oregon Washington ------------------------------------------------------------ MAJOR CONTRIBUTORS TO THIS REPORT ========================================================= Appendix III PROGRAM EVALUATION AND METHODOLOGY DIVISION ------------------------------------------------------- Appendix III:1 Robert E. White, Assistant Director Harry M. Conley III, Sampling Statistician Brian Keenan, Project Adviser G. Mark Schoepfle, Project Adviser DENVER REGIONAL OFFICE ------------------------------------------------------- Appendix III:2 Arthur Gallegos, Project Manager James D. Espinoza, Deputy Project Manager Cynthia C. Schilling, Reports Analyst Tammy S. Olmedo, Computer Programmer Analyst BIBLIOGRAPHY ============================================================ Chapter 1 Smela, Stephen J. "Fulfillment of RCRA Financial Responsibility Requirements," Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, N.J., 1991 U.S. Environmental Protection Agency. RCRA Liability Coverage for Bodily Injury and Property Damage: Survey Results. Washington, D.C.: September 1989. U.S. Environmental Protection Agency. RCRA Orientation Manual. Washington, D.C.: 1990. U.S. General Accounting Office. Hazardous Waste: Issues Surrounding Insurance Availability, GAO/RCED-88-2. Washington, D.C.: October 1987. U.S. General Accounting Office. Superfund: Insuring Petroleum Tanks, GAO/RCED-88-39. Washington, D.C.: January 1988. U.S. General Accounting Office. Hazardous Waste: The Cost and Availability of Pollution Insurance, GAO/PEMD-89-6. Washington, D.C.: October 1988. U.S. General Accounting Office. Ability of Underground Petroleum Storage Tank Owners to Comply with Federal Financial Responsibility Requirements, GAO/T-RCED-90-9. Washington, D.C.: October 1989. U.S. General Accounting Office. Underground Petroleum Tanks: Owners' Ability to Comply with EPA's Financial Responsibility Requirements, GAO/RCED-90-167FS. Washington, D.C.: July 1990. U.S. General Accounting Office. Insurance Regulation: Assessment of the National Association of Insurance Commissioners, GAO/T-GGD-91-37. Washington, D.C.: May 1991.